The week before, CNBC published an article suggesting that "There is an acute crisis that is coming our way" within the multifamily real estate market. The article suggests that the upper tier of the market for luxury is over-built and prone to flattening or a market correction. Developers of apartments in the 150 largest US towns built 395 775 new housing units in the last fiscal year. This represents a 46% increase over the previous year. About 75-80% of these new units of housing are luxurious communities. ,Homepage.

I've seen many major developments being built at a rapid pace when I lived in Boston for the past few years. A majority of these developments are luxurious luxury residences that most people cannot afford. The Boston Globe's Spotlight Team recently published a series of articles on the growth of the "Seaport" neighborhood. The article highlighted its lack of affordable housing, as well as an overabundance of luxury housing that does not cater to the diverse population in the city.

With the advent of all these new multi-family luxury properties, does this put the entire multifamily sector at risk of flattening or even a collapse? If the market is flat and the risk of collapse increases, it is of a collapse for Class A new construction. However existing Class B & C multifamily communities can stand up to market fluctuations and imbalances. Let's go through the reasons behind why there's been an increase in luxury and what will happen when demand slows.

Luxury Demand is Strong

There are a few major factors driving the rising demand for luxury apartments. Baby boomers are moving into cities like Boston and Austin as well as Denver, with a taste for luxurious finishes and amenities-packed properties. This boom can be attributed to the reality that empty-nesters and families with double incomes in the millennial generation are opting to rent instead than buy. Benefits like high-end fitness centers, concierge services, and fully-service pet spas are becoming the standard. It seems like there is an astonishing number of amenities offered with every new construction. Developers are actively incorporating these types of modern perks into their projects; however they're not at a cost.

The cost of construction can be expensive.

The main reason why the majority of new housing complexes you see being put up for sale is luxury is due to the rising costs of construction labor and materials. The demand for construction labor is at an all-time high, as is the price of building materials is the most they have ever been. As Toby Bozzuto, CEO of Bozzuto Group puts it, "The two-by-four isn't concerned about whether it's in a luxurious building or in a budget-friendly building. It costs the same." Because of the high cost of labor and materials, and the appreciation of the raw land, developers are required to construct luxury homes due to the fact that the numbers do not work to build any other type of construction. To make sure that affordable housing is available, cities are enforcing regulations that require developers to incorporate affordable units in their construction plans. The number of units and the location will determine much they charge. But, on their own, these rules will not provide a meaningful increase in the amount of affordable housing.

What alternatives are there for affordable housing? Go here.

There have been many cycles of boom and bust within the construction industry over the decades. In many areas across the country, you'll see a lot of homes built between the 1970's-1990's. While they may seem out-of-date compared to the current construction but the "bonesremain in good shape. The buildings built during this time were constructed using modern techniques and materials. They generally only require surface rehabilitation and wear and tear items can be repaired. These communities, as well as the secondary markets they serve are well placed to counter the influx of luxury homes. They also offer affordable housing. The Class B homes are able to thrive in any economic environment. If the economy is flourishing, Class C tenants shift to Class B properties When the economy is struggling, Class A tenants can find it difficult to justify the extravagant rents and typically move down to more affordable Class B properties. They are typically accessible for less than cost of building. This permits investors to provide the perfect property to live in and still maintain attractive rents that tenants with different incomes can afford.
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